Delaware Court Rules That a Reverse Triangular Merger Does Not Constitute an Assignment By Operation of Law of the Surviving Entity's Contract

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The Delaware Court of Chancery in Meso Scale Diagnostics, LLC v. Roche Diagnostics GmbH (Feb. 22, 2013),[1] ruled that under Delaware law a reverse triangular merger did not violate a provision in a license agreement of the surviving entity prohibiting an assignment by operation of law or otherwise. The court noted that "[g]enerally, mergers do not result in an assignment by operation of law of assets that began as property of the surviving entity and continued to be such after the merger."[2] This is the first time this issue has been addressed under Delaware law.

The ruling affirms the long-held assumption among M&A practitioners that a reverse triangular merger is similar to a stock purchase in that such transaction structure does not result in an assignment by operation of law of the surviving entity's contracts. The ruling was, however, a welcome development in this case. At the motion to dismiss stage, Vice Chancellor Parsons refused to grant the defendants' motion to dismiss concluding that there was a plausible argument that the anti-assignment clause in the license agreement of the surviving entity (BioVeris) could be violated by the reverse triangular merger structure.

Points to Consider from Meso

  • If a transaction is structured as a reverse triangular merger, generally, the surviving entity will not need to obtain a consent for a contract that prohibits assignment by operation of law or otherwise.
  • Delaware courts have held that Section 259(a) of the Delaware General Corporation Law (which addresses rights of the entities following a merger) results in the transfer of the non-surviving entity's rights and obligations by operation of law.[3]
  • The court noted that "[u]nder Delaware law, stock purchase transactions, by themselves, do not result in an assignment by operation of law."[4] Additionally, the court stated that "Delaware courts have refused to hold that a mere change in the legal ownership of a business results in an assignment by operation of law."[5]
  • If Meso wanted to preclude the licensee from this type of transaction, it should have negotiated for a "change of control provision" in the license agreement.
  • This case was decided under Delaware law. Keep in mind that other jurisdictions may have different approaches. Notably, the United States District Court for the Northern District of California, applying California law, held that a reverse triangular merger resulted in an assignment by operation of law of a contract of the surviving entity in SQL Solutions, Inc. v. Oracle Corp.[6]
  • This decision did not address the federal intellectual property law principles that could affect the assignment rights of a contract. In Cincom Systems, Inc. v. Novelis Corp.,[7] the Sixth Circuit Court of Appeals analyzed the right of assignment of software licenses in a forward merger under Ohio law where the original licensee named in the contract disappeared. In Cincom, the software license specifically provided that the licensee could not transfer the license without the prior written consent of the licensor.[8] Interestingly, the court in Cincom noted that a contract for patent rights or copyright is not controlled by state common law governing assignment rights of contracts in general because of the federal law presumption against assignability of patent and copyright licenses. Thus, even where a patent or copyright license is silent regarding the rights of the parties to assign, federal law provides that consent is required absent clear language to the contrary.